Foreign exchange risks affect the value of a company’s assets, liabilities and cash flows when these are denominated in foreign currencies. Fluctuations in the foreign exchange rates have an impact in a firm’s import payments and receivables from export payments. Foreign exchange risks come from trade, i.e., imports and exports, overseas dividends and overseas assets and liabilities. There are however several ways a business can reduce the impact of foreign exchange risk. One way is through forward foreign exchange contracts. In these contracts, two parties agree to exchange two designated currencies at a specific time in the future at a fixed exchange rate. Forward contracts can normally be booked six months in advance.
Another way to minimize foreign exchange risk is by opening foreign currency accounts. This option is advantageous for importers and exporters. By maintaining an account in the foreign currency which is used in one’s trade transactions, the importer or exporter can hedge against foreign exchange fluctuations by maintaining the foreign currency in the account until the rate is beneficial to him.
Buying currency options is another way of minimizing foreign exchange risks. In this option, one has the right, not an obligation to purchase a certain amount of currency at a specified exchange rate on or before a specified date. This alternative is more expensive than a forward exchange contract because of the flexibility it offers.
Works Cited
International Trade eLearning Suite for SMEs. Foreign currency and exchange risks. n.d. Web. 7 March 2013
Meera, Ahamed Kameel Mydin. Hedging foreign exchange risk with forwards, futures, options and the gold dinar: A comparison note. n.d. Web. 7 March 2013
The Hongkong and Shanghai Banking Corporation Limited. "Foreign exchange risk management." 2013. commercial.hsbc.com.hk. Web. 7 March 2013
